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Wednesday, March 10, 2010

Quinn's Budget: Heavy Cuts, Borrowing and No Tax Increases

A few weeks back the Civic Federation said that the state of Illinois was facing a long term budget deficit of about $11 billion and proposed a series of spending cuts and tax increases. Today, Governor Pat Quinn has proposed a budget with heavy spending cuts and borrowing but no tax increases.

Gov. Pat Quinn will offer a state budget plan today that relies largely on heavy borrowing and deep spending cuts, his chief of staff said during a briefing Tuesday with reporters.

While Quinn has supported the idea of raising taxes to help the state resolve its massive budget woes, the governor's spending plan won't call for a specific tax increase, chief of staff Jerome Stermer said. Still, he said Quinn believes Illinois needs additional revenue to help pay its bills.

"The governor will propose a budget that doesn't have new revenues," Stermer told reporters. "It's not a budget that he's going to like proposing, I can guarantee you that."

The problem with heavy borrowing, as proposed in this budget, is that it robs Peter to pay Paul. While the Illinois constitution demands that we have a balanced budget there are many gimmicks. For instance, if you create a one billion dollar bond offering at 7%, and sell it all this year, you would create one billion in cash flows in and only $70 million outflows cash flows. Of course, that $70 million would become a yearly outflow of cash in your budget whereas the one billion would only be written on this year's budget.

So bond offerings, like those proposed by Quinn, are a great way of balancing a budget in a particular year. What it does is further erode the state's long term financial health. The state is already at a critical stage and now we're going to go through another series of borrowing. That will only further erode the state going forward. It's exactly these sort of gimmicks that have put the state in this position to begin with. Now, it will be further made worse by this set of borrowing.